FEBRUARY 2017 METHODOLOGY. DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers

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1 FEBRUARY 2017 METHODOLOGY DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers PREVIOUS RELEASE: MARCH 2016

2 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 2 Contact Information Gregory Pau Senior Vice President, Industrial Global Corporates Tel gpau@dbrs.com Michael R. Rao, CFA Managing Director, Global Corporates Tel mrao@dbrs.com Eric Beauchemin, CFA Group Managing Director, Global Corporates Tel ebeauchemin@dbrs.com Table of Contents Scope and Limitations 3 Introduction 3 Issuer Ratings, Recovery Ratings and Instrument Ratings 3 Recovery Rating Process 4 Determination of a Path to Default Scenario 4 Valuation of the Issuer upon Emergence from Default 4 Determination of Claims against the Defaulted Entity 6 Distribution of Value from the Defaulted Entity 6 Assignment of a Recovery Rating and Notching of the Issuer Rating to Determine a Final Instrument Rating 6 Monitoring 8 Appendix: Considerations when Evaluating Security 9 DBRS is a full-service credit rating agency established in Spanning North America, Europe and Asia, DBRS is respected for its independent, third-party evaluations of corporate and government issues. DBRS s extensive coverage of securitizations and structured finance transactions solidifies our standing as a leading provider of comprehensive, in-depth credit analysis. All DBRS ratings and research are available in hard-copy format and electronically on Bloomberg and at DBRS.com, our lead delivery tool for organized, web-based, up-to-the-minute information. We remain committed to continuously refining our expertise in the analysis of credit quality and are dedicated to maintaining objective and credible opinions within the global financial marketplace.

3 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 3 Scope and Limitations This criteria outlines the current DBRS approach for recovery ratings that are assigned to specific instruments for corporate non-investment-grade issuers. The methods described herein may not be applicable in all cases; the considerations outlined in DBRS methodologies are not exhaustive and the relative importance of any specific consideration can vary by issuer. Further, this methodology is meant to provide guidance regarding the DBRS methods used in the sector and should not be interpreted with formulaic inflexibility, but understood in the context of the dynamic environment in which it is intended to be applied. Introduction This recovery rating criteria applies only to specific instruments issued by corporate non-investment-grade issuers; in other words, those issuers with a DBRS issuer rating of BB (high) or lower. DBRS assigns recovery ratings to instruments of non-investmentgrade issuers because non-investment-grade bonds have a greater likelihood of default, investors have a greater interest in the outcome of a potential default scenario and an assumed default scenario can be more reliably constructed. This criteria is not applicable to areas related to ratings on public finance (government and infrastructure) or financial institutions. DBRS does not assign recovery ratings to preferred share securities that are by definition low recovery instruments. In addition, recovery ratings are not used for commercial paper or short-term instruments, which by definition have shorter maturity durations and a higher reliance on liquidity considerations. The recovery rating criteria herein assumes the issuer s host country supports creditor rights in a manner broadly consistent with that of a U.S. or Canadian jurisdiction. If not, different criteria may apply. While the underlying security impacted by a recovery rating will have a rating trend unless it is on an under-review status, recovery ratings themselves have no trends and are not placed under review. In most cases, a recovery rating will not be maintained for very long on a security that has downgraded to Default or Selective Default. (For definitions of these terms see Default Definition at Issuer Ratings, Recovery Ratings and Instrument Ratings Credit risk is a function of an issuer s probability of default and the loss given default on a specific debt instrument. For noninvestment grade corporate issuers, DBRS assigns separate ratings for these two components of credit risk. A DBRS issuer rating is DBRS s assessment of the probability that an issuer will default on its debt. A DBRS recovery rating, on the other hand, considers the value of assets (or enterprise value) that would be available to an investor for a specific debt instrument, in accordance with its ranking and legal rights, at the time of an assumed emergence from a reorganization or liquidation process that might occur between, for example, six and 18 months after default. A recovery rating necessarily assumes that a default will occur; the actual probability of default is addressed solely by the issuer rating. In this recovery rating criteria for corporate non-investment-grade issuers, DBRS draws a distinction between companies that have issuer ratings of B (high) or lower and companies with issuer ratings in the BB range. BB-rated issuers are less likely to default than issuers rated B (high) or lower, which makes it more difficult to construct a scenario for both a path to default and asset or enterprise values at default. For BB-range issuers, DBRS is more restrictive in terms of the degree of notching uplift it will permit between the issuer rating and the recovery rating, so as to limit the possibility of non-investment-grade issuers having instruments rated well into investment-grade territory. DBRS sets these tougher recovery standards for BB-rated issuers in order to smooth the rating scale transition between non-investment-grade issuers (whose instruments are subject to this recovery criteria) and investmentgrade issuers.

4 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 4 The final instrument rating, determined by notching up or down from the issuer rating in accordance with the recovery rating (see the Recovery Rating table on page 7), essentially blends the two elements of credit risk probability of default and loss given default giving investors an additional measure of the expected performance of a non-investment-grade bond. Recovery Rating Process There are five stages in the determination of a recovery rating and final instrument rating: 1. Determination of a path to default scenario, 2. Valuation of the issuer upon emergence from default, 3. Determination of claims against the defaulted entity, 4. Distribution of value from the defaulted entity, and 5. Assignment of a recovery rating and notching of the issuer rating to determine a final instrument rating. Determination of a Path to Default Scenario While a non-investment-grade issuer may not default for several years (if ever), a recovery rating necessarily assumes an eventual default. DBRS considers the types of likely issues that may cause the deterioration in the business and financial risk factors that might ultimately cause its default. This is a logical extension of the issuer rating analysis, which draws on the industry and specific company knowledge that DBRS developed as a result of determining an issuer rating. Various factors may be stressed to create realistic (albeit perhaps somewhat draconian) default simulations that would be considered in the ultimate construction of the default scenario. This analysis can also help address the question of whether the issuer is likely to eventually emerge from this assumed default as a reorganized operating business or whether it is more likely to be liquidated. While this analysis should help DBRS understand the specific factors that might cause default, it is, nonetheless, difficult to predict both how and when a default might actually occur. Sustained negative free cash flow is one possible early warning sign of potential default. In other cases, consideration might be appropriate for situations where an issuer may preemptively file for bankruptcy protection in order to reorganize its capital structure or gain concessions from labour, suppliers or other stakeholders. In still other cases, an issuer might raise cash, not from operations, but from asset sales or an equity injection, in order to delay default with the hope that any operating challenges it faces are temporary. The timing of default may be very different in each of these scenarios and the ultimate recovery value can be different as well. An issuer that defaults preemptively may be able to prevent further erosion of asset value and cash flow. On the other hand, when an issuer tries to delay default and only attempts to reorganize when business conditions reach a crisis point, enterprise value could be substantially lower than what it might otherwise have been. DBRS notes that there can be a wide variety of different industry and company factors to consider when determining a path to default scenario. Valuation of the Issuer upon Emergence from Default Once an assumed default scenario has been constructed, DBRS then considers the possible value of the enterprise (if the business is assumed to be sold as a going concern) or the value of specific assets (in, for example, the case of an assumed liquidation). DBRS may use one or more of the following methods, as appropriate, in estimating the enterprise value of an issuer or its assets upon emergence from default. In most cases, the first approach below (1) would be used. In other cases, method (2) or (3) would be more appropriate. A hybrid approach may also be possible, for example, where certain more marketable operating units are valued on a going concern basis and other assets are valued on a liquidation basis. DBRS strives to perform valuations that are conservative and can be maintained over a reasonable time horizon. While DBRS periodically updates its recovery analysis, the path to default scenario and accompanying valuations at default would not typically be expected to change significantly year over year, absent any special factors.

5 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 5 1. Enterprise valuation (EV) using a multiple of EBITDA approach In this method, enterprise value would be equal to a forecast baseline annual EBITDA times an appropriate (stressed) multiple of EBITDA. DBRS typically applies this approach to issuers expected to be reorganized or sold as ongoing businesses after emergence from default, as opposed to issuers that are expected to be liquidated. Such issuers often have a viable business with a meaningful market position, reasonably efficient operations and established clientele where default may have been triggered by a cyclical downturn and/or excessive leverage rather than by any long-term fundamental industry or company weakness. In determining a baseline annual EBITDA, DBRS may consider performance of the issuer across past business cycles, the outlook for the industry in general and the possibility that the company that emerges from restructuring may not have the same strengths it had prior to restructuring (such as key personnel, suppliers or customers). In determining the appropriate (stressed) multiple to apply to EBITDA, DBRS will generally examine companies in similar industries with similar market positions as a reference starting point, recognizing that potential investors will perceive higher risk in purchasing a company emerging from a reorganization and therefore may only pay a deeply discounted multiple of EBITDA. While this exercise can involve case- by-case assessments of factors specifically relevant to the issuer concerned and DBRS may also consider a range of worst-case and best-case valuations before settling on a final EV, the ultimate EBITDA multiple used will in most cases be a low multiple appropriate for this evaluation (i.e., typically not higher than five times EBITDA). In certain cases, it may be possible to determine enterprise value using a discounted cash flow approach, in lieu of the multiple of EBITDA approach discussed above. There can also be cases where EV is believed to be the most appropriate approach, but the industry is one where EBITDA levels are volatile and can be (or have in the past been) negative. In such situations, DBRS may estimate EBITDA through an average of past year results. 2. Industry-specific valuation approach Many industries have their own accepted metrics for valuing specific assets or entire business franchises. DBRS may assign, for example, a (stressed) value per hotel room, per subscriber or per unit volume of certain resources (e.g., oil or gas) in accordance with these industry practices. We may use these industry-specific approaches as our primary evaluation method, or in conjunction with either one of methods (1) or (3). 3. Liquidation value approach This approach is appropriate when the issuer is not expected to be reorganized as a going concern, but is more likely to be liquidated in whole or in part. Asset value estimations might typically be made for accounts receivable and inventory, specialized plant and equipment, real estate, marketable brands and trademarks, and so on. In valuing specific assets, DBRS may refer to third-party appraisals, typical bank loan-to-value advance rates and similar yardsticks, with discounts or reductions as appropriate. Typical liquidation value percentages (as a percent of book value) are shown in the table below, although DBRS may use liquidation value percentages outside of these ranges depending upon the nature and location of the assets. Where possible, the book value of assets to be liquidated will be forecast at the future presumed time of default, although in practice, the most recent balance sheet, adjusted for items like an assumed departure of all cash on hand, is a reasonable starting point. While valuations depend on many factors, the following table illustrates some general starting points and other considerations in the liquidation analysis.

6 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 6 Asset Typical Liquidation Value Percentages (as % of book value) Comments Cash 0% In a default scenario, this is assumed to be zero. Accounts receivable 60% 80% A moderately higher level may be appropriate if there is a substantial government or highquality corporate obligor concentration. Inventory 0% 75% Within this wide range, a higher or lower percentage may be appropriate depending upon whether the inventory is readily saleable commodities versus perishable or illiquid work in progress, for example. Property, plant and equipment 25% 50% A higher percentage may be appropriate, for example, where the current appraised market value of owned real estate is significantly higher than book value. Intangibles, other than goodwill 0% 50% Licenses, trademarks, software, etc. are often of limited value to a third party, although situations vary and there will be cases where intangibles will be expected to have value to certain buyers. Goodwill 0% Pure accounting goodwill (i.e., the excess of purchase price over the book value of assets acquired) is typically given no value in a liquidation scenario. Other Assets 0% 100% This could include prepaid expenses, shares in subsidiaries (for a holding company), etc. whose potential value covers a very wide range. Determination of Claims against the Defaulted Entity Claims against a defaulted entity include debt of various types and, in certain cases where a liquidation value approach is being used, debt may also include trade payables, contractual obligations of other types as appropriate (leases, pensions, guarantees, etc.) and taxes. The costs of reorganization or bankruptcy (legal and trustee fees, for example) are typically not material relative to the size of claims; however, these may also be considered where appropriate. Finally, in the liquidation scenario only, where the entity has a sizable staff and is thus likely to have a meaningful level of salary payments within payables, DBRS may consider this to be a priority payment that ranks ahead of debt obligations if this is supported by applicable laws and regulations. To arrive at the amount of total debt at an assumed default, DBRS will assume that committed credit lines are drawn down in full prior to default, unless it is very clear that drawdown is restricted by the availability of collateral (perhaps due to a borrowing base) or covenant test. Debt that matures prior to the assumed time of default is generally assumed to be refinanced and be included in our assessment as obligations at default. Distribution of Value from the Defaulted Entity In determining how much each class of creditor will likely receive upon emergence of the company from a reorganization, DBRS generally uses a typical waterfall analysis. A waterfall analysis generates recovery percentages for each debt class, comparing: (1) the value of assets available to pay that debt class (the numerator), with (2) the amount of that debt class s claim (the denominator). At the top of the waterfall, for the highest-priority claims, the numerator may be larger than the denominator, indicating that there is sufficient value for the claim to be fully paid. As higher priority claims are paid, fewer assets remain for the next claimant, and so on, down the line of creditors. In creating the waterfall, DBRS takes the basic claims and security rights of investors as presented, even though the reality of negotiations in a corporate reorganization are such that junior creditors and even preferred and common shareholders may obtain greater economic value than what they might otherwise be contractually entitled to obtain, in order to get the reorganization done. For more detail on how DBRS evaluates collateral security, please refer to the Appendix.

7 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 7 Assignment of a Recovery Rating and Notching of the Issuer Rating to Determine a Final Instrument Rating As noted above, the anticipated recovery percentage for each debt instrument represents the expected value available to a specific debt class to the claims within the debt class. DBRS will then use the appropriate DBRS recovery rating scale in the following table the right- hand column for issuers rated B (high) and lower and the middle column for BB-range issuers to assign a recovery rating to each instrument. The resulting instrument rating reflects the issuer rating notched up or down by an amount that corresponds to the assigned recovery rating, subject to the limitations and restrictions for certain cases noted in the footnotes to the table and discussed further below. Note that a recovery rating of RR1 (and, to a somewhat lesser extent, RR2) is unlikely to be assigned unless DBRS views a high degree of quality and long-term stability in specific assets and/or an enterprise value that might arise, for example, from regulatory protection or the presence of high-quality real estate. DBRS makes a distinction between the impact of recovery ratings on instrument ratings for issuers rated B (high) or lower and issuers in the BB range for several reasons. First, the assumed default scenario (i.e., timing and cause of default, as well as the amount of debt outstanding and the valuation of assets upon emergence from default) is more difficult to forecast as the issuer rating rises (given the lower probability of default and the longer likely time to default). Second, BB-range issuers are more likely to issue debt or otherwise reorganize their capital structure that may involve changes in the granting of security, making forecasting of the final capital structure more difficult. Third, as a general matter, DBRS will expect greater ratings volatility potential for lower- rated issuers; therefore, our criteria becomes more limited the closer an issuer gets to investment grade. DBRS Recovery Rating, Anticipated Recovery (%) and Recovery Description B (high) and Lower Rated Issuers Notching Versus Issuer Rating 1 BB Range Issuers RR1 100% and above 2 Outstanding +3 notches, if the debt is secured, subject to an instrument rating cap of BB +1 notch, if the debt is unsecured (i.e., equivalent to the notching for an RR3) +2 notches, if the debt is secured and the issuer rating is BB (low) +1 notch, if the debt is secured and the issuer rating is BB or BB (high) 0 notches, if debt is unsecured (i.e., equivalent to the notching for an RR3) RR2 80% to 100% Substantial +2 notches, if the debt is secured +1 notch, if the debt is unsecured (i.e., equivalent to the notching for an RR3) +1 notch, if the debt is secured, subject to a cap of BB (high) 0 notches, if the debt is unsecured (i.e., equivalent to the notching for an RR3) RR3 60% to 80% Good RR4 30% to 60% Average RR5 10% to 30% Below Average RR6 0% to 10% Poor +1 notch 0 notches 0 notches 0 notches -1 notch -1 notch -2 notches -2 notches 1 In all cases, secured debt refers to a first-lien position. Where a secured position results from a second or more subordinate lien, DBRS will typically deem such subordinate positions to be no better than an unsecured position, for purposes of determining a recovery rating. 2 Recovery above 100% means that the asset value available for a particular class of debt is greater than, and in some cases, substantially greater than, the face amount of the debt obligation.

8 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 8 Recovery scale for both BB range and B (high) and lower range issuers When two instruments would both be notched to the same instrument rating category, the junior instrument is typically notched down by one additional notch to reflect the junior ranking of that instrument. Recovery scale for issuers rated B (high) or lower (right column) For issuers rated B (high) or lower, an elevation of three notches above the issuer rating is only appropriate in those cases where the debt is secured in a first-lien position. Furthermore, three notches of ratings uplift is only given to instruments of B-rated issuers or lower; in other words, the final instrument rating for these issuers cannot exceed BB. Recovery scale for issuers rated in the BB range (middle column) For reasons noted above, issuers in the BB range are subject to a more restrictive recovery rating approach. The BB range is a transitional range between B (high) or lower-rated issuers (who are subject to the full recovery rating methodology) and investmentgrade-rated issuers (who are not subject to any specific recovery analysis). While DBRS will start with an analysis of the value of assets and/or enterprise value of issuers with issuer ratings in the BB range, as it does with issuers rated B (high) or lower, constructing a likely path to default, capital structure at default, or valuation at default for BB-range issuers is very subjective. To compensate for this forecasting difficulty associated with issuers in the BB range, it will be harder for issuers in this rating range to achieve any ratings uplift and no more than two notches of ratings uplift will be permitted. Furthermore, a two-notch rating uplift is only available to those issuers with an issuer rating of BB (low). To be sure, for an RR1 recovery rating to be assigned that would result in two notches of uplift to be given to instruments of an issuer with a BB (low) issuer rating, DBRS will expect to see first-lien secured debt, forecasted enterprise or asset value at least equal to (and in most cases, much greater than) the fully drawn debt of that instrument class, as well as stable asset values that might arise from, for example, regulatory protection or very high-quality real estate collateral. Monitoring After assigning a recovery rating, DBRS will monitor the issuer and its debt instruments for material changes that might affect recovery and other ratings including, for example: Changes in the amount of debt outstanding per interim financial statements. Changes in debt structure (including bank facilities) or collateral provisions. Changes in factors or assumptions that might affect DBRS s estimates of enterprise value or the value of assets. Changes in the organization (mergers and acquisitions activity, recapitalizations, etc.). Changes in intercreditor relationships.

9 DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers DBRS.COM 9 Appendix: Considerations when Evaluating Security There are a number of potential issues that analysts may consider when evaluating the security provisions of a specific instrument. Overlapping security claims: Often secured lenders will have a security interest in all assets, or words to that effect. This often means all assets that have not already been pledged to other parties. It may also mean all assets within a certain geographic region or legal jurisdiction (for example, the United States), or otherwise indicate that there may be fewer assets available for security than the total shown on firm s consolidated financial statements. Some analytical work may therefore be required to determine what percentage of the company s assets and total cash flow is actually represented by the lenders collateral security. Higher-priority claims: In cases where certain creditors have higher-priority claims on specific assets, an analyst would have to reduce the estimate of enterprise value available to other creditors to account for satisfying the claims of the priority creditors first. Holding company and structural subordination issues: Each corporate entity can only give a lender a security interest in assets it actually owns. A holding company generally only owns stock, so a pledge of all assets from a holding company is only a pledge of the stock in its subsidiaries. For the security interest to include the operating assets of the company which is what generates the cash flow then the pledge must be from the operating subsidiaries that actually own those assets. For that asset pledge to be enforceable, there generally has to be a guarantee from each of these subsidiaries pledging assets to the secured debt, as well as valid legal consideration for the granting of the guarantee and pledge. In the event that structural subordination of the holding company s debt is mitigated by guarantees from the operating subsidiaries but not secured by any pledge of the subsidiaries operating assets, the creditors could only expect to have claims ranked pari passu as the unsecured creditors of the operating subsidiaries in the event of default. Collateral sharing issues: Different lending groups will often share collateral; for example, one group may have a first lien on current assets and a second lien on plant and equipment, and the other may have a first lien on plant and equipment and a second lien on current assets. Excesses and deficiencies: Secured creditors who come up short from the proceeds of their specific collateral generally file claims as unsecured creditors for the deficiency. Similarly, any excess from pledged collateral security over and above what the secured creditors are owed becomes available to pay unsecured creditors. Intercreditor negotiation and accommodation: Bankruptcy can be a long, expensive and highly complex process. Depending on the perceived strength of various parties to the proceeding and their desire for speedy resolution and other factors, out-of-court settlements and compromises sometimes result, with different distribution of valuation proceeds than what would be achieved via the theoretical waterfall allocation. Typically, these may involve higher-priority claimants agreeing to receive less than their full claim in order to provide token compensation to certain junior claimants, who would otherwise stand to recover little or no value, so as to obtain their cooperation and avoid a lengthy court battle. In some cases, in anticipation of such intercreditor negotiation, creditors would enter into an intercreditor agreement to predetermine in an orderly fashion the mechanism or framework of such resolution to facilitate recovery, should default occur. It is important to highlight here that DBRS s recovery analysis can only be based on the security arrangements and priority ranking, as they exist under the various contractual agreements at the time of the analysis.

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